microeconomics test 2 uark - Assignment Essays

question

behavioral economics

answer

situations in which people make choices that do not appear to be economically rational

question

utility

answer

enjoyment or satisfaction people receive from consuming a good/service

question

can you measure utility?

answer

it is difficult to measure, you can't compare it against people

question

law of diminishing marginal utility

answer

diminishing marginal satisfaction as they consume more of a good/service given a period of time

question

budget constraint

answer

limited amount of income available to consumers to spend on a good/service

question

giffen good

answer

a higher price causes you to buy more, it has an upward sloping demand curve

question

bounded rationality

answer

although decision makers want a good outcome, either they are not capable of performing the problem or they are not inclined to do so

question

what causes rationality? what are the pitfalls?

answer

1) money, but not nonmonetary opportunity costs
2) sunk costs
3) unrealistic about future behavior

question

endowment effect

answer

tendency for people to be unwilling to sell a good they already own if they are offered a price that is greater than the price they would be willing to pay for it

question

loss aversion

answer

individuals place more weight on avoiding cost or losses (gambling)

question

status quo bias

answer

people want to maintain their current choices

question

sunk costs

answer

a cost that has already been paid and cannot be recovered

question

present bias

answer

put too much weight on now instead of future (putting off homework)

question

indifference curve

answer

curve that shows the combination of consumption bundles that give the consumer the same utility
the indifference curve cannot cross each other, breaks law of transitivity

question

marginal rate of substitution

answer

the rate at which a consumer would be willing to trade off one good for another

question

substitution effect

answer

change in Qd that results from a change in price, making the good more or less expensive relative to other goods

question

income effect

answer

change in Qd that results from an effect of a change in price on consumers purchasing power

question

technology

answer

processes of the firm uses to turn inputs into outputs

question

technological change

answer

change in the ability of a firm to produce given levels of output with a given quantity of inputs

question

short-run

answer

period of time during which at least one of the firms inputs is fixed

question

long-run

answer

period of time in which a firm can vary all of its inputs

question

total cost

answer

FC + VC
cost of all inputs used in production

question

variable cost

answer

costs that change as the output changes

ex. labor, capital

question

fixed cost

answer

costs that remain constant as output changes

ex. rent, insurance

question

explicit cost

answer

costs that involve money

question

implicit cost

answer

costs that are non-monetary

question

accounting profit

answer

accounting profit - explicit profit

question

economic profit

answer

economic profit - explicit costs - implicit costs

question

what is the difference between accounting profit and economic profit?

answer

economic profit accounts for opportunity costs (implicit costs) while accounting profit does not

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of outputs of that good

question

If you purchase socks at $5 and get 25 units of MU from the last unity, and bandanas at $3 and get 12 units of MU, what product has more MU/$?

answer

Socks: 25/5 = 5 MU/$
Bandanas: 12/3 = 4 MU/$

Socks has more MU/$

question

Law of diminishing marginal product

answer

adding more of a variable input, such as labor, to the same amount of a fixed input will cause the marginal product of the variable input to decline
(too many chefs in the kitchen)

question

marginal cost

answer

the change in a firm's total cost from producing one more unit of a good or service

question

formula for marginal cost

answer

MC= TC2-TC1/Q2-Q1

change in total cost divided by change in quantity

question

Long-run ATC

answer

shows the lowest cost at which a firm is able to produce a given quantity of output in the long-run when no inputs are fixed

question

economies of scale

answer

situation when a firm's long-run average costs fall as it increases the quantity of output it produces

question

diseconomies of scale

answer

when the long-run ATC increases as output increases

question

constant returns to scale

answer

output increases directly in proportion to an increase in all of the outputs

question

isoquant

answer

curve that shows all combinations of two inputs (capital, labor) that will produce the same level of output

question

how do firms decide the level of inputs and outputs to produce?

answer

firms will search for the cost-minimizing combination of inputs that will allow them to produce at a given level of output

question

isocost lines

answer

all the combinations of two inputs (capital, labor) that have the same total cost

question

4 characteristics of a perfectly competitive market

answer

1. many buyers + sellers in the market
2. homogenous products
3. free entry + exit into the market
4. price takers

question

why is the demand curve for perfectly competitive markets horizontal?

answer

because homogenous products are perfect substitutes, which results in a perfectly elastic demand

question

4 steps for finding profit/loss

answer

1. MR = MC will give you Q*
2. Go up to demand curve to find P*
3. Find TR = P x Q and TC = Q* x ATC
4. TR-TC = Profit/loss

question

what happens when your total cost is above your total revenue

answer

you are producing for a loss

question

what happens when your total revenue is above your total cost

answer

you are producing for a profit

question

why would a firm shut down in the short run?

answer

if the AVC > Price

question

what is the "short-run cycle" or what happens to firms in the short-run?

answer

firms make a profit, new firms want to enter, existing firms produce at a loss, some existing firms want to exit the market

it is a cycle

question

what happens in the long run for firms?

answer

zero economic profit

question

productive efficiency

answer

good or service is produced at the lowest possible cost

where MC hits ATC, should be at lowest point in ATC

question

allocatively efficiency

answer

a state in the economy in which production represents consumer's preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it

when D = MR (when demand is horizontal)

question

4 characteristics of monopolistic competitive market

answer

1. many buyers + sellers
2. free entry + exit
3. heterogenous products
4. price makers

question

what are examples of a monopolistic competitive market?

answer

clothing, retail

question

what is the example of a perfectly competitive market?

answer

agriculture

question

output effect

answer

one more unit sold, increasing total revenue by the price at which the unit was sold

question

price effect

answer

in order to sell that last unit, a monopolist must cut the market price on all units sold. this decreases total revenue

question

marketing

answer

all activities necessary for a firm to sell a product to a customer

question

brand management

answer

actions of a firm intended to maintain the differentiation of a product over time

question

what are some critiques of advertising?

answer

they manipulate people's tastes (psychological), impedes competition, makes products more inelastic because of brand loyalty, perceive differences that dont exist (brand names)

question

what are some defenses of advertising?

answer

provides information to customers (would not know about product without it), brand names spend so much advertising they charge higher price, ensures customers can trust quality

question

definition of oligopoly

answer

small number of interdependent firms who compete

question

4 characteristics of an oligopoly

answer

1. few sellers (5 or less)
2. barriers to entry
3. products can either be homogenous or heterogenous (ex. cereal or propane)
4. price makers

question

what are barriers to entry with oligopoly and monopoly?

answer

ownership of key resource and government patents and regulations

question

game theory

answer

study of how people make decisions in situations in which attaining their goals depend on their inner actions with others

question

characteristics of game theory

answer

1. rules that determine what actions are allowable
2. strategies that players employ to attain their objectives in game
3. payoffs- results of the interaction among players' strategies

question

dominant strategy

answer

strategy that is best for a firm, regardless of what other strategies firms use

question

nash equilibrium

answer

a situation in which each firm chooses the best strategy, given the strategy chosen by the other firms

question

collusion

answer

agreement among firms to charge same price or otherwise not compete

question

cournot

answer

competing on quantity

question

bertrand competition

answer

price competition

question

stakleburg

answer

leader/follower (see Saudia Arabia/Nigeria example in notes)

question

decision tree

answer

shows two companies and their rate of return, there is a minimum ROI (return on investment)

question

why is game theory important towards oligopoly?

answer

few firms interact with each other using strategies to get profit, best thing is to act as a cartel
they get a monopoly profit if they act as one
they get a oligopoly profit if they cheat on each other
monopoly profit is greater

question

4 characteristics of a monopoly

answer

1. one seller
2. high barriers to entry
3. heterogenous products (no close substitutes)
4. price makers

question

natural monopoly

answer

economies of scale are so large that one firm can supply the entire market at a lower ATC than two or more firms

question

what are some examples of a natural monopoly?

answer

power, water, trash

question

sherman act (1890)

answer

prohibited restraint to trade including price fixing and collusion

question

clayton act (1914)

answer

prohibited firms from buying stock from competitors and from having director's serve on the boards of competing firms

question

formula for marginal utility (MU)

answer

Δ Total Utility/ Δ Quantity

question

formula for ATC

answer

AFC + AVC
---AND---
TC/Q

question

formula for total cost (TC)

answer

FC + VC

question

formula for average fixed cost (AFC)

answer

FC/Q

question

formula for average variable cost (AVC)

answer

VC/Q

question

formula for total revenue (TR)

answer

P x Q

question

in a perfectly competitive market, what else does demand equal?

answer

D = MR = AR

question

formula for marginal revenue (MR)

answer

Δ TR / Δ Q

question

price discrimination

answer

happens in a monopoly, they charge a higher price and "discriminate", example would be movies with student id vs. without

1 of 87

question

behavioral economics

answer

situations in which people make choices that do not appear to be economically rational

question

utility

answer

enjoyment or satisfaction people receive from consuming a good/service

question

can you measure utility?

answer

it is difficult to measure, you can't compare it against people

question

law of diminishing marginal utility

answer

diminishing marginal satisfaction as they consume more of a good/service given a period of time

question

budget constraint

answer

limited amount of income available to consumers to spend on a good/service

question

giffen good

answer

a higher price causes you to buy more, it has an upward sloping demand curve

question

bounded rationality

answer

although decision makers want a good outcome, either they are not capable of performing the problem or they are not inclined to do so

question

what causes rationality? what are the pitfalls?

answer

1) money, but not nonmonetary opportunity costs
2) sunk costs
3) unrealistic about future behavior

question

endowment effect

answer

tendency for people to be unwilling to sell a good they already own if they are offered a price that is greater than the price they would be willing to pay for it

question

loss aversion

answer

individuals place more weight on avoiding cost or losses (gambling)

question

status quo bias

answer

people want to maintain their current choices

question

sunk costs

answer

a cost that has already been paid and cannot be recovered

question

present bias

answer

put too much weight on now instead of future (putting off homework)

question

indifference curve

answer

curve that shows the combination of consumption bundles that give the consumer the same utility
the indifference curve cannot cross each other, breaks law of transitivity

question

marginal rate of substitution

answer

the rate at which a consumer would be willing to trade off one good for another

question

substitution effect

answer

change in Qd that results from a change in price, making the good more or less expensive relative to other goods

question

income effect

answer

change in Qd that results from an effect of a change in price on consumers purchasing power

question

technology

answer

processes of the firm uses to turn inputs into outputs

question

technological change

answer

change in the ability of a firm to produce given levels of output with a given quantity of inputs

question

short-run

answer

period of time during which at least one of the firms inputs is fixed

question

long-run

answer

period of time in which a firm can vary all of its inputs

question

total cost

answer

FC + VC
cost of all inputs used in production

question

variable cost

answer

costs that change as the output changes

ex. labor, capital

question

fixed cost

answer

costs that remain constant as output changes

ex. rent, insurance

question

explicit cost

answer

costs that involve money

question

implicit cost

answer

costs that are non-monetary

question

accounting profit

answer

accounting profit - explicit profit

question

economic profit

answer

economic profit - explicit costs - implicit costs

question

what is the difference between accounting profit and economic profit?

answer

economic profit accounts for opportunity costs (implicit costs) while accounting profit does not

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of outputs of that good

question

If you purchase socks at $5 and get 25 units of MU from the last unity, and bandanas at $3 and get 12 units of MU, what product has more MU/$?

answer

Socks: 25/5 = 5 MU/$
Bandanas: 12/3 = 4 MU/$

Socks has more MU/$

question

Law of diminishing marginal product

answer

adding more of a variable input, such as labor, to the same amount of a fixed input will cause the marginal product of the variable input to decline
(too many chefs in the kitchen)

question

marginal cost

answer

the change in a firm's total cost from producing one more unit of a good or service

question

formula for marginal cost

answer

MC= TC2-TC1/Q2-Q1

change in total cost divided by change in quantity

question

Long-run ATC

answer

shows the lowest cost at which a firm is able to produce a given quantity of output in the long-run when no inputs are fixed

question

economies of scale

answer

situation when a firm's long-run average costs fall as it increases the quantity of output it produces

question

diseconomies of scale

answer

when the long-run ATC increases as output increases

question

constant returns to scale

answer

output increases directly in proportion to an increase in all of the outputs

question

isoquant

answer

curve that shows all combinations of two inputs (capital, labor) that will produce the same level of output

question

how do firms decide the level of inputs and outputs to produce?

answer

firms will search for the cost-minimizing combination of inputs that will allow them to produce at a given level of output

question

isocost lines

answer

all the combinations of two inputs (capital, labor) that have the same total cost

question

4 characteristics of a perfectly competitive market

answer

1. many buyers + sellers in the market
2. homogenous products
3. free entry + exit into the market
4. price takers

question

why is the demand curve for perfectly competitive markets horizontal?

answer

because homogenous products are perfect substitutes, which results in a perfectly elastic demand

question

4 steps for finding profit/loss

answer

1. MR = MC will give you Q*
2. Go up to demand curve to find P*
3. Find TR = P x Q and TC = Q* x ATC
4. TR-TC = Profit/loss

question

what happens when your total cost is above your total revenue

answer

you are producing for a loss

question

what happens when your total revenue is above your total cost

answer

you are producing for a profit

question

why would a firm shut down in the short run?

answer

if the AVC > Price

question

what is the "short-run cycle" or what happens to firms in the short-run?

answer

firms make a profit, new firms want to enter, existing firms produce at a loss, some existing firms want to exit the market

it is a cycle

question

what happens in the long run for firms?

answer

zero economic profit

question

productive efficiency

answer

good or service is produced at the lowest possible cost

where MC hits ATC, should be at lowest point in ATC

question

allocatively efficiency

answer

question

4 characteristics of monopolistic competitive market

answer

1. many buyers + sellers
2. free entry + exit
3. heterogenous products
4. price makers

question

what are examples of a monopolistic competitive market?

answer

clothing, retail

question

what is the example of a perfectly competitive market?

answer

agriculture

question

output effect

answer

one more unit sold, increasing total revenue by the price at which the unit was sold

question

price effect

answer

in order to sell that last unit, a monopolist must cut the market price on all units sold. this decreases total revenue

question

marketing

answer

all activities necessary for a firm to sell a product to a customer

question

brand management

answer

actions of a firm intended to maintain the differentiation of a product over time

question

what are some critiques of advertising?

answer

they manipulate people's tastes (psychological), impedes competition, makes products more inelastic because of brand loyalty, perceive differences that dont exist (brand names)

question

what are some defenses of advertising?

answer

provides information to customers (would not know about product without it), brand names spend so much advertising they charge higher price, ensures customers can trust quality

question

definition of oligopoly

answer

small number of interdependent firms who compete

question

4 characteristics of an oligopoly

answer

1. few sellers (5 or less)
2. barriers to entry
3. products can either be homogenous or heterogenous (ex. cereal or propane)
4. price makers

question

what are barriers to entry with oligopoly and monopoly?

answer

ownership of key resource and government patents and regulations

question

game theory

answer

study of how people make decisions in situations in which attaining their goals depend on their inner actions with others

question

characteristics of game theory

answer

1. rules that determine what actions are allowable
2. strategies that players employ to attain their objectives in game
3. payoffs- results of the interaction among players' strategies

question

dominant strategy

answer

strategy that is best for a firm, regardless of what other strategies firms use

question

nash equilibrium

answer

a situation in which each firm chooses the best strategy, given the strategy chosen by the other firms

question

collusion

answer

agreement among firms to charge same price or otherwise not compete

question

cournot

answer

competing on quantity

question

bertrand competition

answer

price competition

question

stakleburg

answer

leader/follower (see Saudia Arabia/Nigeria example in notes)

question

decision tree

answer

shows two companies and their rate of return, there is a minimum ROI (return on investment)

question

why is game theory important towards oligopoly?

answer

question

4 characteristics of a monopoly

answer

1. one seller
2. high barriers to entry
3. heterogenous products (no close substitutes)
4. price makers

question

natural monopoly

answer

economies of scale are so large that one firm can supply the entire market at a lower ATC than two or more firms

question

what are some examples of a natural monopoly?

answer

power, water, trash

question

sherman act (1890)

answer

prohibited restraint to trade including price fixing and collusion

question

clayton act (1914)

answer

prohibited firms from buying stock from competitors and from having director's serve on the boards of competing firms

question

formula for marginal utility (MU)

answer

Δ Total Utility/ Δ Quantity

question

formula for ATC

answer

AFC + AVC
---AND---
TC/Q

question

formula for total cost (TC)

answer

FC + VC

question

formula for average fixed cost (AFC)

answer

FC/Q

question

formula for average variable cost (AVC)

answer

VC/Q

question

formula for total revenue (TR)

answer

P x Q

question

in a perfectly competitive market, what else does demand equal?

answer

D = MR = AR

question

formula for marginal revenue (MR)

answer

Δ TR / Δ Q

question

price discrimination

answer

happens in a monopoly, they charge a higher price and "discriminate", example would be movies with student id vs. without

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